Hang Seng Bank Final Results - Part 2

HSBC Hldgs PLC
278February 2000

PART 2

Hang Seng Bank Limited                                    Financial Review
                                                               (continued)

Non-performing advances to customers and provisions

Non-performing advances to customers on which interest has
been placed in suspense or on which interest accrual has
ceased are as follows:

Figures in HK$m                       At 31DEC99   At 31DEC98 
                                                              
Gross non-performing advances on                              
  which interest                                              
- has been placed in suspense              8,323        7,788 
- accrual has ceased                         617          235 
                                           8,940        8,023 
Suspended interest                          (282)        (182)
Gross non-performing advances ^                               
  (page 16)                                8,658        7,841 
Specific provisions                       (3,522)      (3,087)
Net non-performing advances                5,136        4,754 
                                                            
Specific provisions as a                                    
  percentage of gross
  non-performing advances ^                 40.7%        39.4%
                                                            
Gross non-performing advances ^                             
  as a percentage of gross                                  
  advances to customers                      4.3%         3.9%

^Gross non-performing advances to customers are stated after
deduction of interest in suspense.

Non-performing advances to customers are those advances where
full repayment of principal or interest is considered
unlikely. Non-performing advances may include advances that
are not yet more than three months overdue but are considered
doubtful. Advances are classified as non-performing as soon
as it becomes apparent that full recovery of the advances is
unlikely. Except in certain limited circumstances, all
advances on which principal or interest is more than three
months overdue are classified as non-performing.

Gross non-performing advances (after deduction of interest in
suspense) increased by HK$817 million to HK$8,658 million at
31 December 1999. There was a slowdown in the growth of non-
performing advances in 1999. The ratio of gross non-
performing advances to gross advances to customers was 4.3
per cent at 31 December 1999 (3.9 per cent at 31 December
1998). Specific provisions made in respect of non-performing
advances take into account the value of collateral held.

Overdue advances to customers

The amount of advances to customers which are overdue for
more than three months and its expression as a percentage of
gross advances to customers are as follows:

                                       At 31DEC99    At 31DEC98 
                                       HK$m     %    HK$m     % 
                                                                 
Gross advances to customers^ which                                
  have been overdue with respect                                 
  to either principal or interest                                
  for periods of                                                 
- six months or less but over three                              
  months                               785    0.4    1,533   0.8 
- one year or less but over six                                  
  months                             1,611    0.8    1,304   0.6 
- over one year                      4,340    2.1    1,156   0.6 
                                     6,736    3.3    3,993   2.0 
                                                                
Overdue advances to customers (as                               
  above)                             6,736    3.3    3,993   2.0 
Less: overdue advances on which                                     
  interest is still being accrued     (283)  (0.1)    (428) (0.2)
Add: advances overdue for periods                                   
  of three months or less, or                                       
  which are not yet overdue, and                                    
  on which interest has been placed                                 
  in suspense                        2,205    1.1    4,276   2.1 
Gross non-performing advances                                  
(page 15)                            8,658    4.3    7,841   3.9 

^Gross advances to customers are stated after deduction of
interest in suspense.

Advances with a specific repayment date are classified as
overdue when the principal or interest is overdue and remains
unpaid at the year-end. Advances repayable by regular
instalments are treated as overdue when an instalment payment
is overdue and remains unpaid at the year-end. Advances
repayable on demand are classified as overdue either when a
demand for repayment has been served on the borrower but
repayment has not been made in accordance with the
instruction or when the advances have remained continuously
outside the approved limit advised to the borrower for more
than the overdue period in question.

Rescheduled advances to customers

The amount of rescheduled advances and its expression as a
percentage of gross advances to customers are as follows:

                                     At 31DEC99     At 31DEC98
                                      HK$m    %       HK$m   %
                                                              
Rescheduled advances to customers^   1,761  0.9        869 0.4

^Rescheduled advances to customers are stated after deduction
of interest in suspense.

Rescheduled advances are those advances which have been
restructured or renegotiated because of a deterioration in
the financial position of the borrower, or because of the
inability of the borrower to meet the original repayment
schedule.

Rescheduled advances to customers are stated net of any
advances that have subsequently become overdue for over three
months and are included in overdue advances to customers
(page 16). They are also stated after deduction of interest
in suspense and before deduction of specific provisions.

Advances to customers by industry sectors

The analysis of advances to customers (after deduction of
interest in suspense) by industry sectors based on categories
and definitions used by the Hong Kong Monetary Authority is
as follows:

Figures in HK$m                     At 31DEC99    At 31DEC98 
                                                             
Advances to customers for use in                             
  Hong Kong                                                  
Industrial, commercial and                                   
  financial sectors                                          
- Property development                  16,508        14,691 
- Property investment                   23,231        25,052 
- Financial concerns                     3,715         3,388 
- Stockbrokers                             340           119 
- Wholesale and retail trade             4,504         5,154 
- Manufacturing                          1,890         2,263 
- Transport and transport equipment      8,411         8,558 
- Others                                17,443        17,684 
                                        76,042        76,909 
                                                             
Individuals                                                  
- Advances for the purchase of                               
  flats under the Government                                 
  Home Ownership Scheme,                                     
  Private Sector Participation                               
  Scheme and Tenants Purchase                                
  Scheme                                31,936        31,229 
- Advances for the purchase of                               
  other residential properties          73,854        71,864
- Credit card advances                   3,835         3,616 
- Others                                 4,514         4,433 
                                       114,139       111,142 
Total advances for use in Hong Kong    190,181       188,051 
Trade finance                            8,787        10,512 
Advances for use outside Hong Kong       3,276         4,250 
Gross advances to customers            202,244       202,813 

Advances to the industrial, commercial and financial sectors
fell slightly by 1.1 per cent. The fall in the first half of
1999 was partly reversed when loan demand gradually improved
in the second half of the year. Trade finance advances,
however, were 16.4 per cent lower compared with the previous
year-end.

Advances to individuals grew by 2.7 per cent. Residential
mortgages, including those under the Government Home
Ownership Scheme, rose by 2.6 per cent, despite severe
competition. Credit card and other personal advances also
recorded growth.

Long-term investments

Figures in HK$m                     At 31DEC99   At 31DEC98 
                                                            
Debt securities held to maturity                            
Issued by public bodies                                     
- Central governments and central                           
  banks                                  2,720          957 
- Other public sector entities           6,055        6,468 
                                         8,775        7,425 
Issued by other bodies                                      
- Banks and other financial                                 
  institutions                           9,753        7,365 
- Corporate entities                     3,868        2,447 
                                        13,621        9,812 
                                        22,396       17,237 
Equity investments                                          
Issued by corporate entities             4,921        3,634 
Total                                   27,317       20,871 
                                                            
Debt securities held to maturity                            
- Listed in Hong Kong                      703          257 
- Listed outside Hong Kong               2,062        2,461 
                                         2,765        2,718 
- Unlisted                              19,631       14,519 
                                        22,396       17,237 
Equity investments                                          
- Listed in Hong Kong                    4,766        3,356 
- Listed outside Hong Kong                  85           68 
                                         4,851        3,424 
- Unlisted                                  70          210 
                                         4,921        3,634 
Total                                   27,317       20,871 
                                                            

Debt securities held to maturity are stated at cost, adjusted
to give effect to the amortisation of premiums and accretion
of discounts over the period from the date of purchase to the
date of redemption.

Investments in debt securities held to maturity rose by
HK$5,159 million, or 29.9 per cent, to HK$22,396 million at
31 December 1999, with increases in issues by public bodies
as well as by financial institutions and corporate entities.

Hang Seng has adopted Statement of Standard Accounting
Practice 24 (SSAP 24) issued by the Hong Kong Society of
Accountants which became effective on 1 January 1999. To
comply with SSAP 24, long-term equity investments, which are
defined as those not held for dealing purposes and which were
previously stated in the balance sheet at cost less provision
for impairment, are now stated at fair value and the
revaluation gains and losses are taken to the investment
revaluation reserve. The carrying values of long-term equity
investments at 31 December 1998 have been restated on the
basis of the new accounting policy.

At 31 December 1999, the fair value of long-term equity
investments amounted to HK$4,921 million (1998: HK$3,634
million) which included a revaluation surplus of HK$3,959
million (1998: HK$2,423 million). The substantial increase of
HK$1,287 million, or 35.4 per cent, in fair value reflected
the rise in the Hong Kong stock market towards the end of the
year.

The following table shows the fair value of debt securities
held to maturity:

                                          Fair value        
Figures in HK$m                     At 31DEC99   At 31DEC98 
                                                            
Debt securities held to maturity                            
Issued by public bodies                                     
- Central governments and central                           
  banks                                  2,712          967 
- Other public sector entities           6,057        6,519 
                                         8,769        7,486 
Issued by other bodies                                      
- Banks and other financial                                 
  institutions                           9,735        7,362 
- Corporate entities                     3,841        2,409 
                                        13,576        9,771 
                                        22,345       17,257 
                                                            
Debt securities held to maturity                            
- Listed in Hong Kong                      707          254 
- Listed outside Hong Kong               2,057        2,445 
                                         2,764        2,699 
- Unlisted                              19,581       14,558 
                                        22,345       17,257 

Other assets

Figures in HK$m                       At 31DEC99   At 31DEC98 
                                                              
Unrealised gains on off-balance                               
  sheet interest rate, exchange                               
  rate and other derivative                                   
  contracts which are marked                                  
  to market                                1,270        1,207 
Items in the course of collection                             
  from other banks                         4,017        2,514 
Prepayments and accrued income             3,094        3,229 
Other accounts                               809          339 
                                           9,190        7,289 

Current, savings and other deposit accounts

Figures in HK$m                       At 31DEC99   At 31DEC98 
                                                              
Customer accounts                        364,038      341,573 
Certificates of deposit in issue          11,673       10,715 
                                         375,711      352,288 

Current, savings and other deposit accounts grew by HK$23,423
million, or 6.6 per cent, compared with the end of 1998. The
growth was mainly in US dollar time deposits and major types
of Hong Kong dollar deposits. Certificates of deposit in
issue increased by HK$958 million to HK$11,673 million.

Shareholders' funds

Figures in HK$m                       At 31DEC99   At 31DEC98 
                                                              
Share capital                              9,559        9,559 
Retained profits                          17,729       25,005 
Long-term equity investment                                   
  revaluation reserve                      3,959        2,423 
Premises and investment properties                            
  revaluation reserves                     8,228        8,419 
Capital redemption reserve                    99           99 
                                          39,574       45,505 
                                                            
Return on average shareholders'                             
  funds                                     17.6%        13.5%

Shareholders' funds decreased by HK$5,931 million, or 13.0
per cent. Retained profits fell by HK$7,276 million, or 29.1
per cent, compared to 1998 after the payment of a special
interim dividend of HK$7,839 million. The long-term equity
investment revaluation reserve increased by HK$1,536 million,
reflecting the rise in the Hong Kong equity market. This
reserve was created following the adoption of SSAP 24 as
explained in the note on long-term investments on page 20.
Prior-year adjustments have been made to long-term
investments and shareholders' funds at 31 December 1998 to
reflect the change in accounting policy.

The return on average shareholders' funds improved to 17.6
per cent for 1999 from 13.5 per cent for 1998. This was the 
combined effect of an increase in attributable profit and 
the reduction of shareholders' funds.

There was no purchase, sale or redemption of the bank's
listed securities by the bank or any of its subsidiaries
during the year.

Contingent liabilities, commitments and derivatives

Figures in HK$m                     At 31 December 1999         
                              Contract        Credit       Risk- 
                                amount    equivalent    weighted
                                              amount      amount 
                                                                  
Contingent liabilities:                                           
Guarantees                       2,267         2,183       1,171 
                                                                
Commitments:                                                    
Documentary credits and short-                                  
  term trade-related                                            
  transactions                   5,778         1,156       1,156 
Undrawn formal standby                                          
  facilities, credit lines                                      
  and other commitments to                                      
  lend:                                                         
- under one year                51,432            -           - 
- one year and over             14,716         7,358       6,926 
Other                                -             -           - 
                                71,926         8,514       8,082 
                                                                
Exchange rate contracts:                                        
Spot and forward foreign                                        
  exchange                     132,608         2,484         547 
Other exchange rate contracts      786            20           3 
                               133,394         2,504         550 
                                                                
Interest rate contracts:                                        
Interest rate swaps             21,250           178          39 
Other interest rate contracts    7,921             1           - 
                                29,171           179          39 
                                                                
Other derivative contracts           -             -           -

Figures in HK$m                     At 31 December 1998         
                            Contract         Credit       Risk- 
                              amount     equivalent    weighted
                                             amount      amount 
                                                                 
Contingent liabilities:                                          
Guarantees                     1,945          1,870       1,536 
                                                                
Commitments:                                                    
Documentary credits and                                         
  short-term trade-related                                      
  transactions                 4,940            990         988 
Undrawn formal standby                                          
  facilities, credit lines                                      
  and other commitments to                                      
  lend:                                                         
- under one year              56,074              -           -
- one year and over            7,606          3,803       3,803 
Other                            174            174         174 
                              68,794          4,967       4,965 
Exchange rate contracts:                                        
Spot and forward foreign                                        
  exchange                   104,539          1,864         437 
Other exchange rate contracts    274             10           3 
                             104,813          1,874         440 
                                                                
Interest rate contracts:                                        
Interest rate swaps           19,190            237          49 
Other interest rate contracts  5,239              -           -
                              24,429            237          49 
                                                                    
Other derivative contracts       329             20          10 
                                                                    

The tables above give the nominal contract amounts, credit
equivalent amounts and risk-weighted amounts of off-balance
sheet transactions. The credit equivalent amounts are
calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Third
Schedule of the Banking Ordinance on capital adequacy and
depend on the status of the counterparty and the maturity
characteristics. The risk weights used range from 0 per cent
to 100 per cent for contingent liabilities and commitments,
and from 0 per cent to 50 per cent for exchange rate,
interest rate and other derivative contracts.

Contingent liabilities and commitments are credit-related
instruments which include acceptances, letters of credit,
guarantees and commitments to extend credit. The risk
involved is essentially the same as the credit risk involved
in extending loan facilities to customers; these transactions
are, therefore, subject to the same credit origination,
portfolio maintenance and collateral requirements as for
customers applying for loans.

As the facilities may expire without being drawn upon, the
total of the contract amounts is not representative of future
liquidity requirements.

Off-balance sheet financial instruments arise from futures,
forward, swap and option transactions undertaken in the
foreign exchange, interest rate and equity markets.

The contract amounts of these instruments indicate the volume
of transactions outstanding at the balance sheet date and do
not represent amounts at risk.

The credit equivalent amount of these instruments is measured
as the sum of positive mark-to-market values and the
potential future credit exposure in accordance with the Third
Schedule of the Banking Ordinance.

Figures in HK$m                     At 31DEC99   At 31DEC98 
                                                            
Replacement cost                                            
Exchange rate contracts                  1,487        1,168 
Interest rate contracts                    127          207 
Other derivative contracts                   -            - 
                                         1,614        1,375 

The replacement cost of contracts represents the mark-to-
market assets on all contracts (including non-trading
contracts) with a positive value and which have not been
subject to any bilateral netting arrangement.

Additional Information                                                    

1. Accounting policies

The accounting policies adopted are consistent with those
described in the Financial Review, Report of the Directors
and Financial Statements for 1998 except for a change in the
accounting policy for long-term equity investments which has
been amended in accordance with SSAP 24.

Long-term equity investments, which are defined as those not
held for dealing purposes, were previously included in the
balance sheet at cost less provisions for impairment.
Following the implementation of SSAP 24, long-term equity
investments are carried at their fair values. Gains and
losses on long-term equity investments arising from changes
in fair value are accounted for as movements in the
investment revaluation reserve until the investment is sold
or until the investment is determined to be impaired at which
time the cumulative gain or loss is included in the profit
and loss account for the period.

Following the change in accounting policy,  prior-year
adjustments have been made to long-term investments and
shareholders' funds at 31 December 1998.

2. Capital ratios

The capital ratios for both 1999 and 1998 take account of
market risks in accordance with the relevant Hong Kong
Monetary Authority guideline.

3. Property revaluation

The bank's premises and investment properties were revalued
by HSBC Property (Asia) Limited, a fellow subsidiary company,
as at 30 November 1999. The valuations were carried out by
qualified valuers who are members of the Hong Kong Institute
of Surveyors. The basis of the valuation for premises was
open market value for existing use. The basis of the
valuation for investment properties was open market value.
The property revaluation has resulted in a fall in the bank's
revaluation reserves of HK$92 million as at 31 December 1999
and a charge to the profit and loss account of HK$25 million
in respect of properties where the valuation has fallen below
depreciated historical cost.

4. Year 2000 readiness

Hang Seng adopted the Year 2000 conformity requirements
issued by the British Standards Institution as its definition
of Year 2000 compliance.

The objective of Hang Seng's Year 2000 compliance programme
is to ensure that there is no disruption to Hang Seng's
services caused by the changing of dates during and after the
Year 2000. A steering committee, with representatives from
key business units, monitors the progress of the programme,
which is reported to the Board of Directors and the Audit
Committee. Following the changeover to the Year 2000, Hang
Seng has no material Year 2000 incidents to report.

The programme involved testing all of Hang Seng's own
relevant systems to ensure that they were Year 2000
compliant. Suppliers and service providers were asked to
confirm that their products and services are Year 2000
compliant. Hang Seng also assessed its customers' commitment
to becoming Year 2000 compliant and provided information and
assistance to help customers understand the risks and issues.
As part of the programme, the Year 2000 compliance programmes
of the various clearing and central depository systems in
which Hang Seng participates were also monitored. Hang Seng
participated in external interface testing with these
systems, where possible, during 1999.

Since mid-1999, Hang Seng's own relevant computer systems
have been successfully tested to the relevant British
Standards Institution requirements for Year 2000 compliance.
Software systems installed at Hang Seng provided by outside
companies have also been tested.

In addition, contingency plans have been in place to
mitigate, for example, a problem with a computer system
supplied by an outside company and the possibility of the
failure of systems or processes outside Hang Seng's control.

Lack of readiness on the part of third parties could expose
Hang Seng to the potential for loss, impairment of business
processes and activities and disruption of financial markets.
Hang Seng has been addressing these risks through bilateral
and multiparty efforts and has participated in industry and
global initiatives.

For a number of years Hang Seng has been modifying systems to
be Year 2000 compliant when making other enhancements. The
costs of the Year 2000 modifications incurred as part of such
a combined package have not been separately identified. For
the year of 1999, costs incurred on Year 2000 modifications,
which have been separately identified, total HK$0.4 million.
For the period from 1 January 1998 to 31 December 1999, costs
incurred on Year 2000 modifications, which have been
separately identified, total HK$24 million (including HK$10
million attributable to incremental external costs). All
modification costs are charged as expenses except for capital
equipment purchases. Adequate budgets were provided and spent
according to plan. Costs relating to major systems changes
that are not directly related to the Year 2000 but which
address some Year 2000 issues are not included in these
costs.

At 31 December 1999, there was no outstanding commitment
authorised by the Directors in respect of Year 2000
modification costs.

5. Statutory accounts

The information in this news release does not constitute
statutory accounts.

Certain financial information in this news release is
extracted from the statutory accounts for the year ended 31
December 1999, which contain an unqualified auditors' report
and will be delivered to the Registrar of Companies and the
Hong Kong Monetary Authority.

6. Ultimate holding company

Hang Seng Bank is an indirectly-held, 62.14 per cent-owned
subsidiary of HSBC Holdings plc.

7. Register of shareholders

The Register of Shareholders of Hang Seng Bank will be closed
on Wednesday, 15 March 2000 and Thursday, 16 March 2000,
during which period no transfer of shares can be registered.
In order to qualify for the second interim dividend, all
transfers, accompanied by the relevant share certificates,
must be lodged with the bank's Registrars, Central
Registration Hong Kong Limited, Shops 1712-1716, 17th Floor,
Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong,
for registration not later than 4:00 pm on Tuesday, 14 March
2000. The second interim dividend will be payable on
Thursday, 23 March 2000 to shareholders on the Register of
Shareholders of the bank on Thursday, 16 March 2000. The
Annual General Meeting of the bank will be held on Tuesday,
18 April 2000.

8. News release

Copies of the full announcement may be obtained from the
Company Secretary Department, Level 10, 83 Des Voeux Road
Central, Hong Kong. The 1999 Annual Report will be sent to
shareholders in late March 2000.